Slackening shackles of low-pay poverty trap

Tories and Labour lay claims and counter-claims in battle to win voters with their tax plans

The aggression of this week's Conservative attack on Labour plans to halve the starting rate of income tax to 10 pence in the pound has confused the point - that the policy is designed to help the low-paid.

In the 1970s, the great Tory charge against Labour was that it was inflicting punitive top tax rates of 83 per cent on earnings, and 98 pence on savings, of the country's wealth- creators.

With the top rates of tax long since reduced to 40 pence for both earnings and investment income, the punishment is now being meted out to those least able to afford it - the low-paid.

As The Independent reported yesterday, the poverty trap is alive, and kicking the lowest income groups.

According to the latest Department of Social Security tax-benefit calculations, a married couple with two children can lose 97p in the pound in tax and benefits on earnings above pounds 98.22 a week.

In such a case, the breadwinner would only see pounds 1.50 of a pounds 50 pay rise - the difference between pounds 140 and pounds 190 a week would hardly be worth a good candle.

But the DSS calculations show that there are even worse examples of the way in which the low-paid are caught out - there are points at which the low-paid can actually lose money.

Take, for example, a married couple with one child under five, and a full-time earner on pounds 190 a week.

The DSS estimates that the family would be left with a net income of pounds 132.27 after housing costs in an average private tenancy, and tax and national insurance contributions of pounds 34.18 a week.

Because family credit becomes "fully disregarded" in housing benefit calculations on a weekly income of pounds 193.83, a pay rise of pounds 30 a week, to pounds 220, would leave that family pounds 3.99 a week worse off.

The DSS says the "marginal deduction rate" becomes 123.1 per cent at that point - the family loses 23p for every extra pound earned.

Labour's long-term aim to reduce the starting rate of tax from 20p to 15p and, eventually, 10p is specifically designed to help such people - not only by reducing their tax burden, but also by ensuring that the tax cut is not immediately clawed back through benefit cuts.

The shadow Chancellor, Gordon Brown, said yesterday: "The 10p starting rate is a good long-term objective because it is good for creating jobs and for giving work incentives.